U.S. Supreme Court Rules That Age Is a Permissible Factor in Determining Eligibility for Retirement Benefits
 
June 27, 2008
 
Lindsay V. Dennis- Jacksonville

In Kentucky Retirement Systems v. EEOC, No. 06-1037, decided June 19, 2008, the United States Supreme Court held that the use of age as a factor in the determination of retirement benefits does not establish a prima facie case of discrimination in violation of the Age Discrimination in Employment Act (ADEA). For an employee to state a claim under the ADEA for differential treatment because of pension status, the employee must present evidence to show that the differential treatment was “actually motivated” by age, not merely a pension eligibility factor.

Using Age as a Factor in a Retirement Benefit System May Be Permissible Under the ADEA

Kentucky’s “hazardous position” employees, e.g. police officers, become eligible for normal retirement benefits either after working 20 years or after working five years and attaining age 55. Disability retirement benefits are calculated differently, however. The aim of the disability retirement benefit plan is to give the worker the same retirement benefits he/she would receive if he/she had continued to work until eligible for normal retirement. The plan achieves this aim by “imputing” additional years of service to employees disabled when younger than age 55 (the normal retirement age) to bring them to 20 years of service, but it does not give this credit to disabled employees who have reached their 55th birthday and who have qualified for normal retirement. Consequently, the plan results in some employees disabled after age 55 receiving lower disability retirement benefits than individuals disabled before reaching age 55.

Charles Lickteig was an employee of the Jefferson County Sheriff’s Department who sought disability retirement benefits at age 61 after nearly 18 years of service. Because he was over age 55 with more than five years of service and thus eligible for normal retirement, his disability retirement benefits were calculated on his nearly 18 years of service (as under normal retirement). Had he been under age 55 and thus not eligible for retirement benefits when he became disabled, his years of service would have been increased to 20 and he would have received higher disability retirement benefits. Lickteig sued, claiming that the Kentucky pension plan’s negative treatment of and impact on older employees such as himself because of their age violated the ADEA.

The U.S. Supreme Court held that the Kentucky pension plan’s use of age as a factor in determining disability benefits does not discriminate based on age.

• First, the Court noted that age and pension status remain “analytically distinct” concepts, and that Congress has approved the use of age as a factor in determining pension eligibility, as well as to determine Social Security Disability Insurance benefits.
• Second, the Court found that there was a clear non-age-related rationale for the Kentucky plan. The plan simply seeks to treat disabled employees as if they had worked until the point at which they would be eligible for a normal retirement pension. Age factors into the disability calculation only because the plan’s normal retirement rules themselves permissibly consider age. Thus, the disparity Lickteig challenged depends upon pension eligibility, not age per se, the Court said. Also, although the plan placed an older worker at a disadvantage here, in other cases, the plan may favor older workers, who may get a bigger boost of imputed years than younger workers.

Finally, the Court said, Kentucky’s system does not rely on the kinds of stereotypical assumptions, e.g., the work capacity of “older” workers relative to “younger” workers, that the ADEA sought to eradicate.

But the Supreme Court did not close the door to all claims of age discrimination based on pension status. An employer is subject to liability under the ADEA if an employee can show that pension eligibility or benefit requirements are a mere “proxy” for age intended to disadvantage older workers simply because they are older.

What This Means for Employers

The decision means that employers may still use age as a factor in retirement benefit systems as long as they do not disadvantage individuals based solely on their age. As the Supreme Court reiterated in this case, although age is often correlated with both years of service and pension eligibility, the concepts are distinct: decisions based on years of service or pension eligibility requirements, even if age-linked, are not equivalent to impermissible decisions based solely on age. Employers must ensure, however, that age is not used as a “stand-alone” basis to disadvantage older employees. For example, assuming all employees over age 55 with five years of service are eligible for normal retirement benefits, an employer could not reduce benefits for those over age 62 in order to induce them to retire. It is also essential that employers be consistent in applying their pension policies to all employees. Consistent application of an established policy is evidence that an employer’s actions are not “actually motivated” by age-based animus.

Holland & Knight attorneys can assist you in designing compliant and effective retirement benefit programs.

For more information, email Lindsay V. Dennis at lindsay.dennis@hklaw.com or call toll free, 1.888.688.8500.